INVESTMENTS 投资学 （博迪BODIE, KANE, MARCUS）Chap026 Hedge Funds.ppt

CHAPTER 26 Hedge Funds Funds of Funds Optionality can have a big impact on expected fees. Fund of funds pays an incentive fee to each underlying fund that outperforms its benchmark even if the aggregate performance is poor. Diversification can actually hurt the investor in this case. Funds of Funds Spread risk across several different funds Investors need to be aware that these funds of funds operate with considerable leverage. If the various hedge funds in which these funds of funds invest have similar investment styles, diversification may illusory. Example 26.6 Incentive Fees in Funds of Funds A fund of funds has $1 million invested in three hedge funds Hurdle rate for the incentive fee is a zero return Each fund charges an incentive fee of 20% The aggregate portfolio of the fund of funds is -5% Still pays incentive fees of $.12 for every $3 invested Fund 1 Fund 2 Fund 3 Fund of Funds Start of year (millions) $1.00 $1.00 $1.00 $3.00 End of year (millions) $1.20 $1.40 $0.25 $2.85 Gross rate of return 20% 40% -75% -5% Incentive fee (millions) $0.04 $0.08 $0.00 $0.12 End of year, net of fee $1.16 $1.32 $.25 $2.73 Net rate of return 16% 32% -75% -9% INVESTMENTS | BODIE, KANE, MARCUS INVESTMENTS | BODIE, KANE, MARCUS Copyright ? 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Hedge Funds vs. Mutual Funds Hedge Fund Transparency: Limited Liability Partnerships that provide only minimal disclosure of strategy and portfolio composition No more than 100 “sophisticated”, wealthy investors Mutual Fund Transparency: Regulations require public disclosure of strategy and portfolio composition Number of investors is not limited Hedge Funds vs. Mutual Funds Hedge Fund Investment strategy: Very flexible, funds can act opportunistically and make a wide range of investments Often use shorting, leverage, options Liquidity: Often have lock-up periods, require advance redemption notices Mutual Fund Investment strategy: Predictable, stable strate